Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Wednesday, August 21, 2013

TAXPAYERS SCREWED BY TAX COURT

The recent issue of
NATP’s TAXPRO MONTHLY discussed David P and Veronda L Durden v Commissioner (TC Memo 2012-140).This was another case where the Tax Court
upheld the IRS disallowance of a legitimate charitable contribution made to a
qualified charity because the taxpayers did not comply with the strict letter
of the law.

In 2007 the taxpayers
did legitimately donate over $20,000, in several separate contributions of more
than $250, to a qualified 501(c)(3) organization eligible to receive
tax-deductible donations.

The taxpayers were
audited in 2009, and produced cancelled checks and a statement from the church,
dated January 10, 2008, that documented the full amount they had deducted.Unfortunately the statement from the church
did not specifically indicate that no goods or services, other than intangible
religious benefits, were provided in exchange for the donation, and was
therefore not accepted by the IRS.

The couple obtained a
second statement from the church, dated June 21, 2009, that clearly indicated
that no goods or services were provided.But the IRS ignored this second statement because it was not “contemporaneous”
– i.e. received from the done organization before the earlier of the date the
original tax return is filed or the extended due date of the tax return.

The first letter,
dated January 10, 2008, was contemporaneous but did not contain the requirement
statement.The second letter, dated June
21, 2009, contained the required statement but was not contemporaneous.

I do agree it is right
to require proper documentation to support a charitable deduction.Before the stricter rules that require a
hard-copy receipt for every single dollar contributed to a church or charity in
order to claim a tax deduction on Schedule A I would venture a guess that at
least 50% of all charitable deductions claimed on Schedule A each year were at
least slightly overstated.And I do
believe that recipient organizations should be required to verify that no goods
or services were provided in exchange for the donation.But I draw the line at this strict adherence
to a “contemporaneous” statement.

If the taxpayer can provide
proper documentation that the money was actually given to the charity, via
cancelled checks, and that it was an
actual charitable donation, via an acknowledgement from the charity, and the charity confirms to the IRS or
the Tax Court either in writing or by oral testimony that no goods or services
were provided, the deduction should be allowed.The written statement that no goods or services were provided, if not
contemporaneous, should be allowed to be provided, under penalty of perjury,
either during the audit or in court.

I do understand, and
know full well, that cancelled checks by themselves are not sufficient proof
that a donation was actually made.

I am reminded of the
tale of the church member who approached his pastor one Sunday after the
service.The member told the pastor that
he noticed there was a lot of loose cash in the collection plate each week,
which would be kept in the church overnight before counting and depositing, and
that he, as a retail business owner, needed lots of cash at the beginning of
each week for his cash register.He
proposed that after the service each Sunday he write a check to the church in
exchange for all the loose paper bills in the collection plate.This way the church would not have excessive
cash in its office overnight and he would have extra cash for use at his retail
location – a benefit for both parties.

Each week the
businessman would write a personal check to the church for $100-$200 and take
the cash home with him.On his tax
return he claimed a deduction for the total of all the checks he wrote to the
church for the year.

{I have told this
story to prove a point, and not to suggest a way to cheat on your taxes!}

So it is better to
have both cancelled checks and an
independent individual or cumulative receipt or statement, regardless of the
amount of each separate contribution.

Do you agree with me
that the Tax Court decision, while legally appropriate, was basically wrong in
this and other similar cases, and that “non-contemporaneous” statements
regarding the receipt of goods or services should be acceptable?

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